From Equity Method to Fair Value: A Step-by-Step Walkthrough of Ind AS 28 Exit Using BSE–CDSL Divestment

From Equity Method to Fair Value: A Step-by-Step Walkthrough of the Ind AS 28 Exit Using the BSE–CDSL Divestment

Dissecting a regulator-mandated stake sale and its precise accounting consequence under Indian GAAP

 Setting Out the Context: – What was The Trigger Event

The story begins with a regulatory directive. BSE Limited (NSE symbol: BSE), India’s oldest stock exchange and itself a publicly listed entity, had historically held a strategic stake in Central Depository Services (India) Limited (CDSL) which is the country’s second central securities depository and a company that BSE originally promoted. That stake, which had stood at approximately 20% as at March 31, 2023, meant CDSL was classified as an associate of BSE in its consolidated financial statements. Accordingly, BSE was accounting for the investment using the equity method as prescribed under Ind AS 28 : Investments in Associates and Joint Ventures.

That arrangement changed in June 2023. SEBI’s regulatory framework governing market infrastructure institutions stipulates that a recognised stock exchange cannot hold more than 15% equity interest in a depository. BSE’s ~20% holding exceeded this cap. In compliance, BSE executed a market sale of approximately 5.28 lakh (528,000) shares of CDSL at a price of approximately ₹986 per share, mopping up proceeds of approximately ₹468 crore. Post-transaction, BSE’s residual holding fell to approximately 15% which was comfortably within the SEBI cap, but critically, below the threshold at which significant influence is presumed to exist.

With that sale, CDSL ceased to be an associate of BSE. The investment that had spent years on BSE’s balance sheet under the equity method could no longer remain there. A new accounting classification was mandated and the financial consequences were anything but trivial.

The Ind AS Architecture: Two Standards in Collision

Ind AS 28 governs how an investor accounts for interests in entities over which it exercises significant influence, defined broadly as the power to participate in the financial and operating policy decisions of the investee, without having control or joint control. The presumption under Ind AS 28 is that a holding of 20% or more of the voting power confers significant influence, unless it can be clearly demonstrated otherwise. Where significant influence exists, the investor must apply the equity method, that is recognising its share of the investee’s profit or loss, adjusting the carrying amount of the investment accordingly, and routing certain items through Other Comprehensive Income (OCI).

Ind AS 109 Financial Instruments governs the recognition, classification, and measurement of financial assets and liabilities. Equity instruments that do not give rise to significant influence, control, or joint control fall squarely within its scope. Under Ind AS 109, these equity instruments are measured at fair value, i.e., either through Profit or Loss (FVTPL, the default) or through OCI (FVOCI, an irrevocable election available for equity instruments not held for trading). Crucially, Ind AS 109 does not permit the use of the equity method; it is a financial instruments standard, not an investment accounting standard.

The handover between these two standards is governed by Ind AS 28, Paragraph 22, which prescribes what happens when an entity loses significant influence over an investee, i.e., either by disposal of part of the holding or by other means.

Ind AS 28, Para 22 — The operative provision

When an entity loses significant influence over an associate, it shall discontinue the use of the equity method from the date when significant influence ceases. The fair value of the retained interest shall be regarded as its fair value on initial recognition as a financial asset in accordance with Ind AS 109. The entity shall recognise in profit or loss any difference between: (i) the fair value of any retained interest and any proceeds from disposing of a part interest in the associate; and (ii) the carrying amount of the investment at the date the equity method was discontinued.

The Accounting Mechanics Step by Step

Applying Ind AS 28, Para 22 to the BSE–CDSL transaction requires working through a precise sequence of accounting steps. Each step carries a distinct financial statement consequence.

Step I — Freeze the equity method carrying amount

On the date BSE completes the sale of its ~5% stake and CDSL ceased to be an associate which is the date when significant influence was lost & the equity method was discontinued. The carrying amount of the investment in CDSL at that date, as accumulated under the equity method (original cost-plus BSE’s cumulative share of CDSL’s post-acquisition profits and losses, adjusted for dividends received and OCI items), becomes the reference point for the gain/loss calculation. As at the date of sale, CDSL’s market price was approximately ₹986 per share and since CDSL was a listed entity back then as well making the fair value of the retained ~15% stake was readily determinable.

Step II — Compute the gain or loss for P&L

Ind AS 28, Para 22 mandates that the entity recognise in profit or loss the difference between:

(A)  Fair value of retained ~15% interest (at market price on date of sale)

(B)  Plus: sale proceeds from the ~5% sold (approximately ₹468 crore)

Less (C):  Equity method carrying amount of the entire investment at date of sale

BSE’s disclosures in its Q1 FY 2023-24 results filed with BSE and NSE, and in its Annual Report for FY 2023-24, confirm the quantum of gain. In standalone financial results, BSE recognised a profit on divestment of ₹50,417 lakhs (approximately ₹504 crore). In consolidated financial results, the profit was ₹40,662 lakhs (approximately ₹407 crore). The difference between standalone and consolidated figures arises from the elimination adjustments made in the consolidated accounts. Both figures were presented as Exceptional Items in the respective statements of profit and loss.

Step III — OCI reclassification

Ind AS 28, Para 22(c) requires that amounts previously recognised in OCI in relation to the associate investment be reclassified to profit or loss on the same basis as would have been required if the investee had directly disposed of the related assets or liabilities. In CDSL’s case, this would cover items such as BSE’s share of CDSL’s remeasurement gains or losses on defined benefit obligations, and share of CDSL’s hedging reserves which to the extent they had been routed through BSE’s OCI under the equity method. Items that CDSL would not reclassify to P&L (such as remeasurement of defined benefit plans, which remain permanently in OCI under Ind AS 19) are similarly not reclassified by BSE keeping it inline with the consistent application of the mirroring principle.

Step IV — Initial recognition under Ind AS 109

The retained ~15% holding in CDSL, as at the date significant influence was lost, is recognised as a new financial asset under Ind AS 109 at its fair value on that date, i.e. the market price of CDSL shares. This fair value becomes the cost basis for ongoing measurement. Since CDSL is a listed entity, its shares are quoted in an active market, and Level 1 fair value measurement under Ind AS 113 applies (unadjusted quoted price in an active market). BSE did not make the FVOCI irrevocable election for this retained stake and given CDSL’s status as a listed, liquid security, FVTPL is the natural and default classification, meaning all subsequent fair value changes flow directly through BSE’s profit or loss in each reporting period.

Income Tax Consequences — A Note of Caution

BSE’s filing notes that tax of ₹3,910 lakhs on the gain of ₹40,662 lakhs (consolidated) is included as part of tax expenses for Q1 FY 2023-24 and the year ended March 31, 2024. Under Indian income tax law, the gain on sale of listed equity shares held for more than 12 months is treated as Long Term Capital Gain (LTCG) taxable under Section 112A at 10% (plus surcharge and cess) on gains exceeding ₹1 lakh, without the benefit of indexation. The re-measurement gain arising purely from the step-up in fair value of the retained 15% stake (the notional gain from resetting from equity-method carrying amount to fair value under Ind AS 109) is not a taxable event in itself and hence it does not constitute a ‘transfer’ under Section 2(47) of the Income Tax Act, 1961. This creates a temporary difference that feeds into the deferred tax computation. And, since the differential fair value gain has been recognised in the P&L of BSE Limited, similarly, the deferred tax effect of such fair value difference shall also be affected from P&L itself, as per the guidance given under Ind AS 12.

Disclosure Requirements and What BSE Got Right

The disclosure framework for this transition spans multiple standards. Ind AS 112 Disclosure of Interests in Other Entities requires disclosure of the nature and extent of interests in associates, the name of the entity, the nature of the relationship, the proportion of ownership interest, the summarised financial information of the associate (where material), and the reason for ceasing to apply the equity method.

Ind AS 107 Financial Instruments: Disclosures requires disclosure of the classification and fair value of the retained interest, and the method used for fair valuation.

BSE’s filings demonstrate disclosure compliance in three layers: first, in the quarterly results filed under SEBI LODR Regulation 33, where the Exceptional Item is quantified and explained in the notes; second, in the Board’s Report and Management Discussion & Analysis section of the Annual Report; and third, in the Notes to Financial Statements under the investments schedule, where CDSL transitions from appearing as an equity-accounted associate to a financial asset measured at fair value under Ind AS 109.

The Broader Significance: A Pattern Across Indian Markets

The BSE–CDSL transaction is not an isolated occurrence. Across Indian capital markets, this accounting transition, i.e. from the equity method to Ind AS 109, recurs whenever a listed company sells down a strategic associate stake below the 20% significant-influence threshold. The pattern appears in regulatory-driven divestments (like this one), in conglomerate restructurings where holding companies rationalize minority positions, in post-IPO stake dilutions by private equity sponsors, and in merger-driven dilutions where the effective economic interest falls below the influence threshold without the investor actively selling.

The financial reporting consequence is always the same in structure: a potentially large one-time gain or loss (depending on whether the associate’s fair value exceeds or lags its equity-method carrying amount), the reset of the retained holding to market value, and the future treatment of that residual stake as a financial instrument subject to fair value volatility through P&L or OCI. For auditors, the key risk areas are: accuracy of the equity-method carrying amount at the date of transition, correct identification of OCI amounts to be reclassified, appropriate fair valuation of the retained interest (especially for unlisted associates where Level 3 fair value measurement applies), and the deferred tax implications of the temporary difference created.

Conclusion

The BSE–CDSL transaction of June 2023 is, in accounting terms, a precise and well-documented execution of the Ind AS 28 to Ind AS 109 transition protocol. A SEBI regulatory cap forced BSE to surrender significant influence over CDSL. That loss of influence had been crystallised by a stake sale that took the holding from ~20% to ~15% — triggered the mandatory discontinuation of the equity method, the re-measurement of the retained stake at fair value, and the recognition of a substantial gain in profit or loss. BSE booked this as an Exceptional Item at ₹50,417 lakhs standalone, ₹40,662 lakhs consolidated with a tax charge of ₹3,910 lakhs against the consolidated gain.

For finance professionals, the case underscores a principle that is easy to state but complex in execution: under Ind AS, the accounting method is not a permanent choice; it follows the economic substance of the relationship. The moment that substance changes whether by design, regulatory compulsion, or market dilution the accounting must follow, with immediate and material consequences for the income statement. Understanding when and how this transition occurs is not merely a technical compliance requirement; it is fundamental to reading, writing, and interpreting Ind AS financial statements with precision.

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DISCLAIMER

This article is prepared for professional education and general informational purposes only. It is not intended to constitute, and should not be construed as, accounting advice, legal advice, tax advice, or any form of professional opinion on any specific transaction or entity. The figures and disclosures referenced herein pertaining to BSE Limited and CDSL are drawn from publicly available exchange filings and annual reports, and are presented without independent verification. Readers are strongly advised to read the full text of Ind AS 28 (Investments in Associates and Joint Ventures) and Ind AS 109 (Financial Instruments), along with all related Appendices and implementation guidance issued by the Institute of Chartered Accountants of India (ICAI) and the Ministry of Corporate Affairs (MCA), before drawing any conclusions or making any disclosures in financial statements. The application of these standards to any specific fact pattern involves significant professional judgment. You should consult a qualified Chartered Accountant, a technically trained financial reporting specialist, or a statutory auditor with expertise in Ind AS before making any accounting determination, disclosure, or journal entry in connection with the matters discussed in this article. The author and publisher accept no liability for any reliance placed on the contents of this article.